RBNZ Observer Update: Hiked again and there's more to come

The RBNZ lifted its cash
rate by another 25bp to 3.25% today, as expected. The
economy is booming and despite a high NZD the central bank
needs to continue to shift its rate setting back towards
normal. Notwithstanding some recent signs of slowing in the
housing market and lower dairy prices they noted that the
economic expansion has ‘considerable momentum’. Their
forward projections for the 90 day bank bill imply that they
expect at least another 50bp of hikes this year and a total
of 125bp cash rate hikes before end-2015. This path is only
slightly lower than that published in the previous quarterly
statement. We remain of the view that the cash rate could
rise by another 125bp by end 2015.

Facts- The RBNZ lifted its cash
rate by 25bp for the third time this year to 3.25%, as
expected (13 of 15 economists expected a hike, including
HSBC).

- Their forward looking path for the 90-day
bank bill rate was revised down a little in the out year.
The path now has a rate of 4.0% by end 2014 and 4.7% by
end-2015, where the old path had a rate of 4.0% by end 2014
and 4.8% by end-2015.

ImplicationsNew Zealand's economy is booming and the RBNZ is
responding by continuing an aggressive tightening in
monetary policy. Today the RBNZ lifted its cash rate by
another 25bp to 3.25%, the third tightening this year so
far.

They noted that despite some signs of easing
in the housing market and a recent tick down in dairy prices
the 'economic expansion has considerable momentum'. This is
apparent in high levels of business and consumer sentiment
as well as very strong inward migration. The RBNZ is
forecasting GDP growth of +4% y-o-y in Q2 2014, which is
well above trend.

In response to these strong
economic conditions the RBNZ also continued to project a
path for the 90 day bank bill rate that implies further
significant cash rate hikes from here. The path shows the 90
day bank bill rate at 4.0% by the end of this year and 4.7%
by end-2015, which implies that they expect the cash rate to
rise by another 125bp by the end of 2015.

On the
NZD, the RBNZ noted that they do not believe it is
sustainable at these still high levels and that they expect
it to move lower, in line with the recent fall in dairy
prices. However, in a world of very low interest rates and
ongoing unconventional monetary policy actions, an economy
that is booming and needing to lift rates as a result is a
beacon for international capital. Our view remains that the
NZD will continue to be well supported, despite the recent
fall in dairy prices.

Indeed, the message from
the RBNZ is beginning to seem a little inconsistent. They
acknowledge that the economy is booming, that domestic
inflationary pressures are building and they are lifting
rates aggressively as a result. Surely the high NZD is
helping them to hold down inflation, so a continued high NZD
should be welcomed from a central bank whose mandate is to
contain inflation?

We continue to expect that the
RBNZ will lift rates further and agree that rates may rise
by another 125bp before end-2015. We were hesitant about the
RBNZ's willingness to deliver another hike before the 20
September election, although today's official statement
suggests it may be less of a factor in their consideration.
We expect at least another hike this year, with the risk
that the RBNZ lifts rates by another 50-75bp this year as
their own forward track suggests.

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